California's Low Carbon Fuel Standard: Current and Future Impact

The state's CO2 reduction goals regulations are in place, unless a referendum delays implementation.
By William A. Newman | October 14, 2010
California's low carbon fuel standard (LCFS) was enacted to support the California Global Warming Solutions Act of 2006. California meets 96 percent of its transportation fuel needs with petroleum-based fuels. The state believes that the LCFS regulations will allow markets to determine the lowest cost path toward expanded use of alternative fuels while meeting expected future fuel demands. The state officially adopted its LCFS a year ago, designed to lower greenhouse gas (GHG) emissions by reducing the full fuel-cycle carbon intensity of transportation fuels used in California. Regulated parties face reporting requirements for 2010, and must begin reducing carbon intensities in 2011, beginning with a 0.25 percent reduction the first year and increasing to 10 percent in 2020.

Carbon Intensity Measures
The LCFS requires that California fuel providers (producers, importers, refiners and blenders) meet (on average) a standard for GHG emissions, based on annual average carbon intensity. Carbon intensity is defined as the amount of life-cycle GHG emissions reported as grams of CO2 equivalent per megajoule (gCO2e/MJ).

Life-cycle GHG Emissions
The regulations define "life-cycle greenhouse gas emissions" as "the aggregate quantity of GHG emissions ( including direct emissions and significant indirect emissions such as significant emissions from land use changes), as determined by the executive officer, related to the full fuel life cycle, including all stages of fuel and feedstock production and distribution, from feedstock generation or extraction through the distribution and delivery and use of the finished fuel to the ultimate consumer, where the mass values for all greenhouse gasses are adjusted to account for their relative global warming potential."

LCFS regulations define transportation fuel as "any fuel used or intended for use as a motor vehicle fuel or for transportation purposes in a nonvehicular source." Specific regulated fuels include California reformulated gasoline (CARFG); California reformulated gasoline blendstock for oxygenate blending (CARBOB); oxygenate (includes ethanol); diesel; biomass-based diesel, and alternative fuels such as compressed or liquefied natural gas (CNG or LNG), biogas, electricity, and hydrogen. The table shows the energy density assigned to each fuel type.

Regulated Parties
The regulated parties are the in-state producers or fuel importers, who must comply with LCFS and report to the California Air Resource Board, and the importer, who owns the fuel stock in first tankage in California. Generally, when one party transfers a transportation fuel to a non-regulated party (except the ultimate consumer), the recipient becomes a regulated party.

LCFS Credits, Deficits
LCFS credits or deficits for each fuel or blendstock are calculated by taking the average carbon intensity requirement and subtracting the actual (reported) carbon intensity value of the fuel. That result is multiplied by a factor determined by the fuel energy displaced and multiplied by a factor used to convert credits to units of metric tons (MT). There are many exceptions for applying this formula, and the actual formula is listed in Section 95485(a)(3).

A party using a fuel with carbon intensity below the baseline generates credits. Those parties with carbon intensities above the baseline generate deficits. For LCFS compliance, a party's credits must exceed its deficits. A party cannot have a negative balance for two consecutive years. A party also cannot have a credit to deficit ratio of less than 90 percent without being in violation of the regulations.

Reports, Documentation
While specific requirements vary based on type of fuel, any fuel ownership transfer must be recorded with a product transfer document that lists fuel volume and the fuel's average carbon intensity.

The most recent quarterly progress report deadline extension allowed 2010 first-and second-quarter reports to be submitted by Sept. 30. For 2011 and beyond, quarterly progress reports for all regulated parties must be sent to the CARB executive officer by May 31 for the first quarter, Aug. 31 for the second, and Nov. 30 and Feb. 28 for the last two quarters, respectively. Report items vary based on regulated fuel type. All quarterly reports, though, must include a statement attesting to the accuracy and validity of the report, fuel volumes and carbon intensity levels.

Annual reports are due by April 30 for the previous calendar year. The 2010 annual report is due April 30. Specific requirements apply to various types of regulated fuel but all annual reports must include:
>Fuel volume
>Carbon intensity levels
>Total credits and deficits generated within the compliance period
>Any credits carried over from previous compliance period
>Total credits acquired from another party, with that party identified
>Total credits sold or otherwise transferred, with the recipient party identified
>Total credits retired within the LCFS
>Total credits exported to programs outside the LCFS.

Regulated parties must determine the applicable fuel pathway for fuel transfers. Supporting pathway selection documentation must include certification from supplier, product transfer document, contracts and invoices. LCFS assesses penalties based on indirect land use changes (ILUC) associated with different fuel types. While such penalties are intended to promote use of less carbon-intense fuels, they are among the most controversial LCFS provisions.

Regulated parties generating LCFS credits must demonstrate the physical pathway from production to delivery in California. Required documentation includes production facility registration; maps identifying physical pathway route segments for shipments via boat, pipeline, rail or truck, and documents regarding the introduction and exit of fuel shipments from the physical pathway.

A regulated party must retain certain records for at least three years and supply them within 20 days of a written request including product transfer documents, copies of all data and reports submitted to the executive officer, records for each fuel transaction and records used for compliance or credit calculations.

Outlook, Potential Impact
Various studies debate the potential economic and environmental impacts of low carbon fuel standards. Three lawsuits have been filed in response to California's passage of LCFS. California has also qualified a ballot initiative for the November election that would delay LCFS implementation.

While California's LCFS faces some uncertainties, environmental issues and movements that emerge in California tend to spread across the country. Other states are considering similar regulations and the U.S. EPA began requiring GHG reporting last January. Affected parties need to monitor related developments and be prepared to face new compliance requirements.

William A. Newman is an assurance services partner in the Houston office of Weaver. Reach him at 832.320.3261 begin_of_the_skype_highlighting 832.320.3261 end_of_the_skype_highlighting or William.newman@weaverllp.com.